Raytheon Joins Big Guns Gm Deal Gives Company Clout In Defense Industry

A couple of weeks ago, Raytheon Co. was one of several midsized defense contractors jockeying for position in a quickly changing industry.

On Thursday the company became a heavy hitter - one of the big three defense contractors competing for $40 billion in Pentagon contracts.

But the Raytheon that emerges from back-to-back deals to buy defense businesses from Texas Instruments Inc. and General Motors Corp. is a changed company with a whole new set of challenges and a lot of new debt.

The Hughes Electronics defense operation being purchased from GM is the fourth defense acquisition for Raytheon in less than a year, and inevitably ends Raytheon’s one-time strategy to maintain an equal footing in defense and commercial businesses. The combined company will be called Raytheon Co. and will have revenue of about $21 billion a year.

“These last two deals have completed the transformation,” said Jon Kutler, an aerospace analyst for Quarterdeck Investment Partners in Los Angeles. “Whether tomorrow or six months from now, this will be a pure-play defense company.”

Raytheon beat out Northrop Grumman in the winning Hughes bid Thursday, which was valued at $9.5 billion, and in the contest for Texas Instruments’ defense electronics business, which Raytheon last week agreed to buy for $2.95 billion in cash.

Raytheon began bolstering its defense business by purchasing E-Systems, a Texas-based defense electronics company, about a year ago. In April, Raytheon bought Chrysler Corp.’s defense electronics and aircraft modifications units.

Before adding Texas Instruments Defense Systems & Electronics Group, non-defense products made up 50 percent of Raytheon’s business.

Hughes, which GM bought in 1985, is perhaps the last major defense contractor up for grabs after a fouryear series of mergers encouraged by the U.S. government as a way of boosting efficiency among weapons producers.

Adding Hughes to its arsenal makes Raytheon the nation’s No. 3 defense company behind Lockheed Martin Corp. and the company formed by the merger of Boeing Co. and McDonnell Douglas Corp.

In missiles and defense electronics, however, Raytheon is the industry leader.

“At the end of the day, the real growth in the defense industry is in defense electronics. Raytheon will be dominant in that area,” Kutler said. “The strategy is brilliant. Only time will tell whether the price is right.”

Both Hughes and Raytheon make missiles, radar, air-traffic control and communications systems. Raytheon also makes Amana appliances and Beech Aircraft.

In order to pay for last week’s deal with Texas Instruments, Raytheon ran its debt up to about $4 billion. The Hughes acquisition more than doubles that figure by assuming $4.4 billion in additional debt.

“Is it pushing the company to the brink? No. But there’s a lot of debt,” said Roger Threlfall, a defense analyst with J.P. Morgan Securities in New York.

Like other analysts, Threlfall believes Raytheon has abandoned its strategy of putting equal emphasis on its defense and commercial sides.

“Raytheon has said that having commercial and defense companies together creates a situation that ‘traps value,”’ he said. “How you untrap defense is to separate it from the commercial side.”